Thursday, 17 July 2014

The Price of Food

Imagine that, every winter, you heard stories on the radio about the terrible terrible food price increases and how they were hurting poor families. And suppose you never heard stories in the summertime about the just-as-regular price drops. What would you think about the long-term price of food?

Radio NZ called me yesterday asking if I'd come on Morning Report to talk about the latest inflation figures and the price of food. Here's the notes I'd made for myself, some of which I used.

Headline year on year CPI growth is 1.6%, a bit below the
middle of RBNZ’s target band of 1-3%. Again, inflation in tradeables was far
lower than inflation in non-traded goods: for much of the past decade,
inflation in traded goods has helped pull down overall inflation rates. June
quarter inflation in tradeables was 0.1%;
non-tradeables, 2.7%. Food is up 1.6% on last year, in line with overall
inflation rates.

Inflation in food prices attracts a lot of attention because
it’s easy to tell stories about people who are hurt when food prices go up. Quarterly
food price inflation was 0.9%, up on last quarter because it’s winter now, and
1.6% on the year, because we had a bigger increase earlier in the year that
means we’re higher than the same time last year. But we don’t hear as much
about the seasonal price drops in summertime. The December 2011 summertime
price drop and December 2012’s were together enough to make year-on-year food
price inflation negative for three consecutive quarters. And I just don’t get
why a 0.9% quarterly food price increase, like this quarter’s, draws that much
more agonizing than December 2011’s 2.2% quarterly food price drop, or December
2012’s 1.8% drop, or December 2013’s 1.3% drop.

If you take the broader picture and compare food price
inflation to other stuff, it’s not out of whack. Say you had a dollar in June
2006. It would take $1.20 to buy the same total bundle of goods today as then,
but $1.29 to buy the same bundle of food. It would take $1.32 to buy as much
housing and household utilities now as you could have bought for $1 in June
2006. You can get the June 2006 bundle of transportation services for $1.17. Petrol?
$1.26. If we bundle together all the goods that aren’t traded, you’d need
$1.29. For traded goods, you’d need $1.08. Food cost inflation over the longer
period is higher than inflation in other traded goods, but shipping costs per
unit value are going to be higher for food coming in from overseas than for
televisions, and the rest of it’s domestic.

Continuing with 2006 as a base year, the minimum wage was
then $10.25. It’s now $14.25. So a dollar’s worth of minimum wage in 2006 is
now $1.39: hikes in the minimum wage have at least kept up with inflation. If we look at average weekly earnings over
the same period from the quarterly earnings and employment survey, $1 in weekly
earnings in 2006 turned into $1.32 in 2014.

The CTU's Bill Rosenberg didn't like my use of 2006 as base year because he reckons wages haven't done as good a job of keeping up with inflation in more recent years. I'd picked 2006 only because that makes things easy in the RBNZ series: they use 2006 as base year in the recent inflation figures. But, for Bill's benefit, here's the full series, using 2009Q4 as baseline. Why that quarter? Because the wage index actually dropped in March 2010, and he referred to low wage growth over the last 4-5 years. I don't have June 2014 inflation in there because we don't yet have June 2014 wages.

I'm here using the RBNZ's M1 Prices series on CPI and food, and the StatsNZ Earnings and Employment Survey's Average Weekly Earnings series QEX043AA. What's happened to average weekly earnings compared to either CPI and food over the past four years? Compare blue to red and green. It would be better to use median earnings, but that'll be in the annual income statistics which haven't come out for 2014 yet. If I'm picking the wrong series for purpose, I'll defer to whatever Matt Nolan tells me should have been preferable.

Radio NZ referred to me as "The New Zealand Initiative's Eric Crampton" and referred to NZI as successor to the Business RoundTable. Two mild corrections.

First, I don't start officially with NZI until I get myself organised to get to Wellington. My last day with Canterbury as Senior Lecturer in Economics was Monday. Tuesday was my first day as Adjunct Senior Fellow with the Department of Economics & Finance. That unpaid affiliation will continue when I move over to NZI and will let me continue to help out with some supervisory work; I also hope that Econ interns from Canterbury will be able to help us out on a few projects once I'm settled.

Second, NZI is successor to both the NZ Business Roundtable and the New Zealand Institute. The two bodies merged after Roger Kerr's death, with Oliver Hartwich coming in to head things up.